If China turns US soybeans into a trade war target, this company may benefit

As trade war rhetoric heats up, China has hinted of potential restrictions on importing U.S. soybeans, which could benefit shares of Wilmar, UOB KayHian said.

In the short term, soybean crushers such as Wilmar should benefit from increases in both soybean and soybean meal prices as its soybean supplies were largely locked in when soybean prices were still low, UOB KayHian said in a note on Monday.

But in the medium term, restrictions on U.S. soybeans could squeeze crushers’ margins through higher costs, the brokerage said.

“Wilmar, being the second largest soybean crusher (after COFCO) in China, will need to manage its soybean purchases to maintain a good crushing margin,” UOB KayHian said.

In the longer term, passing down the costs of restricting U.S. soybean imports would produce domestic inflationary pressure in China, the brokerage noted, pointing to soybean meal’s primary use as feed for hogs. China’s swine consumption grew at a 2.5 percent compound annual growth rate (CAGR) over 2007-17, it noted.

Inflation fears

“If soybean meal demand remains strong, soybean crushers could pass down the increase in soybean purchases costs to consumer. The increase in soybean and soybean meal prices will lead to an increase in animal feed prices which eventually will lead to higher meat prices if costs are passed down,” the brokerage said.

It noted that the U.S. exported around 52 percent of its soybean production to China over 2016-17; export restrictions could cause “significant’ drops in U.S. soybean prices, while boosting prices of South American soybeans, the brokerage said.

To be sure, the brokerage said it expected the risks of China restricting soybean imports from the U.S. were low.

“If the restriction materialises, there will be insufficient supply of soybean from Brazil and Argentina to cover the shortfall. Moreover, it will increase soybean and soymeal prices in China, leading to inflation,” it said. But it added that China could impose tariffs.

‘Good year for Wilmar’

UOB KayHian kept a Buy call on Wilmar, with a S$4.10 target price.

“Factoring out the import restriction, 2018 is expected to be another good year for Wilmar with net profit expected to grow 21 percent year-on-year,” it said. “Capacity expansion in China will be the key earnings driver moving forward. Its China listing plan is on track. Once more details on its China operations are made available in the listing process, investors might see greater value in Wilmar.”

The brokerage added, however, that Golden Agri-Resources wasn’t likely to see the same benefit from a trade war as it would be “challenging” for a smaller player to run a soybean crushing business. It kept a Hold call with a S$0.31 target on the stock.